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Everyone Loves Warren Buffett, But Should We?

The avuncular CEO of Berkshire Hathaway(BRK.A - Get Report) is the gold standard of American investing. Buffett is the investor millions of investors want to be like.

His annual meeting is an investor's Woodstock, his annual letter to shareholders celebrated like a Springsteen album drop.

But this year is a little different. This year the hype is starting early. This year he's teasing his letter to a national magazine.

And this year it's not working.

So far in 2014 the S&P 500 is basically flat, the Nasdaq is up nearly 3%, and Berkshire-Hathaway is down 4.4%.

Has the "Sage of Omaha" lost his touch?

Over the last quarter Berkshire added to positions in Exxon Mobil
(XOM), US Bancorp
(USB) and DaVita Health Partners
(DVA). All have been winners. Over the last six months the first two are up about 10%, and the last is up over 20%.

But, as even Buffett admits, liquidity can be a curse as well as a blessing. Having a big piece of cash to invest can make the investor a frenetic stock picker. Better to stay with what you know and buy a low-cost, broadly-based mutual fund which tracks the S&P 500, he suggests.

Doing that would have given you a 10-year return of about 61.5%. You would have lost half your stake during the crash that began in 2007 and climaxed in early 2009, but since then the index has nearly tripled in value. Patience is the lesson, your patience will be rewarded.

What Buffett really wanted to talk about in his article, however, was real estate. He writes that he bought a farm because his son understands farming, and bought some New York real estate because he trusted Larry Silverstein, the legendary real estate investor suggesting it.

Both investments have done very well, but what is the lesson? Not all of our sons are as bright as Howard Graham Buffett, and Larry Silverstein won't whisper in many folks' ears.

Perhaps the lesson is simpler, that the time to buy is when everyone is selling, and that distressed assets don't stay that way. Buffett writes that he bought the farm from the Federal Deposit Insurance Corporation for less than the value of its previous loan. He got the New York property through the Resolution Trust Corp., which was disposing the assets of failed savings institutions.

So, wait for the next panic and then buy, buy, buy? The trouble with that is that your "safe" assets become as distressed during a panic as anyone else's, when you're doing things the Buffett way. The S&P 500 fell from more than 1,500 in mid-2007 to a low of 735 in early 2009. So that's when you buy -- with what?

But this column has, so far, been far too hard on Mr. Buffett. Buying based on future productivity, buying what you know and focusing on the game rather than the scoreboard are bromides that, over time, work well. Buffett has proven that.

But when things are generally working, as they are now, when there's no panic in the air, when you're looking at a pile of cash and need to put it somewhere, the Buffett approach does not offer above-market returns. It offers market returns.

The reason Berkshire is down so far this year is pretty simple. Buffett himself says he doesn't understand technology and thus doesn't like to buy it. That much is proven by his big bet on IBM(IBM - Get Report), the worst-performing Dow stock of the year. And if you admit you don't know what's working right now, things just won't work well for you.

The beauty of Buffett is that trends change. Technology won't remain the trend. Other trends will replace it. And while "in the long run we're all dead," as Keynes said, those who invest the Buffett way will leave a lovely estate.

At the time of publication the author had no position in any of the stocks mentioned.

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